We live in a world where bigger is better. There are of course exceptions, such as taxes and a company’s workers’ compensation experience modification factor (e-mod). Generally, the larger the e-mod, the higher the premium.

But e-mods were never intended to reflect a contractor’s commitment to safety and, by extension, its eligibility to work on a job site. Here are 10 reasons anyone using e-mods in the contractor hiring equation should reconsider.

One of the best ways to reduce an e-mod is to prevent workplace accidents. Visit worksafetexas.com for free safety training resources.

E-mod is a pricing modifier – The Texas insurance industry is limited to fewer than 400 base rates for business classification groupings. So it is impossible to accurately price policies for thousands of different kinds of business. E-mods adjust the base rate to help insurance companies accurately price policies, but e-mods are not a report card on safe practices

E-mod data is old – E-mods look back as many as four years, but they ignore a company’s current safety practices. Project owners should assess what contractors are doing today to reduce accidents.

Reserves change – Reserves on open claims change, sometimes dramatically. A reserve that is too high or low can cause an e-mod to be inappropriately high or low.

E-mods can be artificially lowered – Some employers pay claims out of their pocket. By not reporting claims to their carrier, employers artificially lower their e-mod without improving workplace safety.

Subrogation takes time – Subrogation recoveries offset reported claim amounts, but these cases are often litigated. By the time the carrier recovers the funds, the recovery is not reflected in the e-mod.

The e-mod formula changes – The National Council on Compensation Insurance (NCCI) promulgates e-mods used by workers’ compensation insurers. In 2015, NCCI increased the split point in their formula (Texas) from $5,000 to $15,000. This resulted in dramatic increases/decreases at the employer level, without real changes in underlying safety.

The bar keeps getting higher – Technological and safety improvements in business have resulted in decreasing claim frequency. Some contractors, even if they have no losses, may see an increase in their e-mods driven primarily by the drop in claim frequency, not by deterioration in their safety practices.

Business models change – Companies are merged, sold and acquired every day. And it is not uncommon for companies to dispose of unprofitable business segments and/or venture into new segments. E-mods react slowly to changes in the underlying business model. For example, a bakery could add a trucking component to its distribution system. The bakery might operate safely, but the trucking exposure does not. In this case, the e-mod would be artificially low, reflecting only the safe bakery operations.

Stuff happens – Consider an electrical contractor traveling from between job sites. Another driver dozes off, crosses the median and hits the contractor. Because the contractor was injured in the scope and course of employment, he is entitled to workers’ comp benefits. Neither the contractor nor his employer did anything wrong, but this claim will adversely the e-mod.

Fraud affects everyone – Most claims are legitimate, but some employees fake injuries, exaggerate injuries or otherwise cheat the system. When they do, they drive up claim costs and e-mod values for even the most safety-conscious employers.

Agents: Arm your clientsIf we put too much stock in e-mods, we unfairly disqualify safe contractors from bidding on jobs. Risk managers should instead focus on a company’s current safety and business practices. And agents should begin working with their contractor clients to arm them with knowledge to face the changes ahead. For more information about e-mods, visit Texas Mutual and NCCI online.

Most people don’t often think of their workers’ compensation policy until they pay their premium or file a claim. You may be surprised to learn that you can take small steps during the year to save money when you renew your policy. Your experience modifier (e-mod) is one of the keys.

In part one of this two-part series, I explained what an e-mod is. In this installment, I will give you tips for controlling your e-mod and your workers’ comp premium.

Prevent workplace accidents

The best way to reduce an e-mod is to reduce losses. The best way to reduce losses is to prevent accidents. Employers have access to thousands of free workplace safety materials through the Occupational Safety and Health Administration, the Texas Department of Insurance and Texas Mutual Insurance Company.

Focus on return-to-work

When on-the-job injuries force employees to miss work, some employers react by replacing them and moving on with business as usual. That approach is costly for both parties.

A return-to-work process helps injured workers return to productive employment. If they are unable to perform all of their normal job duties, the process provides alternative productive work they can do while they recover.

By 2015, fraud will cost the property and casualty insurance industry $80 billion a year. Those costs will trickle down to everyone in the form of higher premiums. Employers can help insurance carriers fight fraud and its cascading effects if they learn the red flags.

Learn your role in subrogation

If a third party contributed to an on-the-job accident, your insurance company may be able to recover some or all of the costs from the third party. The process is called subrogation, and it can help reduce your claim costs and your premium. Most subrogation recoveries involve vehicles, products or premises. You can facilitate the subrogation process if you know what to look for.

Come to a free workshop

If you are an insurance agent who wants to learn more about e-mods, class codes and other workers’ compensation topics, come to a free Texas Mutual workshop. You will earn 3.5 CE credits for attending.

Shelly Horelica is a certified insurance counselor with 25 years’ experience in workers’ compensation insurance. As a senior marketing specialist, Shelly partners with independent insurance agents across the state and helps them get the most value for their clients’ premium dollars. Shelly shares her expertise with agents as a presenter at Texas Mutual’s free workers’ comp workshops.

Most people don’t often think of their workers’ compensation policy until they pay their premium or file a claim. You may be surprised to learn that you can take small steps during the year to save money when you renew your policy. Your experience modifier (e-mod) is one of the keys.

What’s an e-mod?

An experience modifier is a factor used in the calculation of your insurance premium. It reflects your loss experience. To qualify, a business must have an average workers’ compensation premium of $5,000 during the last two or more years of coverage, or develop at least $10,000 premium during the last year. The experience modifier formula is complicated, but in its simplest form, it is actual losses/expected losses. If your business’ actual losses are lower than expected for your industry, you should receive a favorable experience modifier.

How do losses impact e-mods?

The e-mod formula puts a cap on larger losses. It also gives greater weight to accident frequency rather than the severity of a loss. Claims with $0 losses are not considered in the actual calculation and do not affect an employer’s e-mod.

E-mods: the good, the bad and the average

E-mods come in all sizes. An e-mod of 1.00 is considered average, and it will not positively or negatively affect premium. An e-mod of less than 1.00 is a credit e-mod, indicating a risk with better-than-average experience. An e-mod over 1.00 is a debit e-mod, indicating a risk with worse-than-average experience.. Let’s look at how this could impact premium.

Company

Base premium

E-mod

*Adjusted premium

A

$43,925

1.00

$43,925

B

$43,925

.70

$30,747

C

$43,925

2.00

$87,850

*Prior to underwriter pricing considerations

In the example above, Company C gets the same amount of coverage as the other companies, but may pay significantly more because it has a debit e-mod. In our next installment, I will give some tips for reducing your e-mod and, in turn, your premium.

About the author

Shelly Horelica is a Senior Marketing Specialist. Shelly has been working with Texas Mutual insurance agents for 19 years. She also works closely with the marketing representatives across the state. Shelly is a frequent presenter at our statewide workers’ comp workshops and is a certified insurance counselor with 25 years’ experience in workers’ compensation insurance.